November 27, 2004

Brad Setser Fears That the Bush Social Security "Reform" Is Going to Worsen Our Fiscal Problems

Yet another take on the Bush administration's Social Security "reform" plans:

Brad Setser's Web Log: The budget deficit before all the bad stuff: Isn't that what leaving any increase in deficit associated with partial privatization of social security off the books implies?... [E]ven I did not think they would float the idea of excluding any increase in the deficit associated with the transition off the books.

W has long spoke against the "soft bigotry of low expectations" -- the idea that you are doing a student who does not meet educational standards a favor by promoting the student to the next grade, irregardless. But isn't that kind of like what the Bush economic team is proposing here? If you cannot meet the 2% of GDP fiscal deficit target in 2008, conventionally defined, shift the goal post/ make the test easier/ change the way the deficit is measured so a 4% of GDP deficit is now called a 2% of GDP deficit. Judging from the currency markets today, I suspect cooking the books won't pass the global test.

That is why the market should discount the administration's new talk of fiscal discipline -- they show no signs of being willing to make hard choices. A serious proposal for partially privatizing social security would raise taxes to fund the transition costs -- not change the way the deficit is measured so that the transition costs are kept off the official books....

It is easy to see how partial privatization could increase, not decreate Social security's long-term deficit. Roubini wrote about this recently in his blog. To cut the long-term deficit in the social security system, you need to increase revenues/ decrease benefits. Partial privatization reduces the systems' revenues, which means the needed cut in benefits is much deeper. If you partially privatize and don't cut benefits enough to eliminate the existing (after 2042) deficit AND the additional deficit created by diverting funds into private accounts, you make the system's long-term deficits worse.

3) The deficit in the general fund -- i.e. the non-social security part of the government -- starts looking pretty scary after 2010 or so if you assume W's tax cuts are made permanent. That is a much more immediate problem than the post 2042 social security deficit....

Given the Bush administration's past track record--on alliance management, on defense spending priorities, on farm policy, on trade policy, on budget balance, on the Medicare drug benefit--it is indeed hard to do anything other than presume that whatever Bush proposal emerges will make things better rather than worse.

Posted by DeLong at November 27, 2004 05:07 PM | TrackBack
Comments

"The deficit in the general fund -- i.e. the non-social security part of the government -- starts looking pretty scary after 2010 or so if you assume W's tax cuts are made permanent."

Ah, but that will be for the NEXT president to deal with (hopefully Giuliani, if there's any justice left in the world) -- just as Reagan had left office before the consequences of his deficit came flapping home to roost on Bush Sr. and Clinton. We are going to see this sort of binge-and-purge fiscal policy become a monotonously regular feature of American politics from now on if we don't pass a balanced-budget Constitutional amendment with teeth (and including Social Security and Medicare funds in its purview) -- just as Sen. Paul Simon and Michael Kinsley were saying a decade ago. A pity they couldn't persuade the supposedly brilliant Bill Clinton to listen.

Posted by: Bruce Moomaw at November 27, 2004 06:02 PM

"it is indeed hard to do anything other than presume that whatever Bush proposal emerges will make things better rather than worse."

Brad, I think you meant "worse rather than better."

Posted by: RT at November 28, 2004 04:26 AM

To the extent that no changes are made to future benefits, then whatever Bush does to SS does not fundamentally change the picture. Downsides would be a major raid on SS by Wall Street fund managers sucking out management fees and turning over SS portfolio management to a public that does not understand the difference between the stock market and a racing card, and has neither the time nor the inclination to educate themselves to protect their investments. Upside would be that a portion of SS would be in accounts that "must pay out" and therefore be offlimits as a tool to prop up deficit spending.

However, deficit spending can be controlled by people willing and interested in governing. SS can be protected without exposure to the risks of the stock market. Those who think the public can be informed on this issue and a logical debate win the day need only to look at the 2001 tax cuts or the 2004 election. The only way to protect SS from Bad Policy may be to demagogue the issue. It is a shame that our country cannot have a rational debate, but that is impossible given the class warfare the Republican elites are waging on the rest of the country.

Posted by: bakho at November 28, 2004 08:09 AM

Bruce, the binge and purge cycle is due solely to the present nature of the GOP. It started with Reagan, and continued with Dubya. Right now the the GOP is seriously dominant. The American people, mass media and corporations were willing to believe Supply Side II only a decade after Supply Side I had visibly failed. Dubya has also figured out what that he can get away with this, and inflict the mess on a Democratic president (unless the GOP is so dominant that there isn't a Democratic president for a decade more).

This all makes me believe that Supply Side will end only when external economic discipline is imposed on the US government.

Posted by: Barry at November 28, 2004 05:56 PM

bahko,

Well, you've made the most honest case against privatization I've seen yet: the unwashed masses can't handle their money, so the anointed shall manage it for them. And we'll keep it this way through manipulative politicking!

I think you make two mistakes. (Three, if you count the advocacy of deplorable political tactics.) First, it's just not good enough to wishfully speculate that "deficit spending can be controlled by people willing and interested in governing." Nor, for that matter, that SS in general will be managed ably by these same "people." You can't wish for the best while you simultaneously complain about the ignorant and irrational public that can only be herded through demagoguery. And whether or not a reflection of popular will, the Federal Government has shown no serious commitment to prudent spending habits. That's not surprising--the political benefits of spending are significantly greater those of prudence. By the same token, there's no significant incentive to manage SS well--hence the approach of a crushing deficit. (That, and the whole pyramid scheme.)

But the opposite is true of the supposedly dumb guy who actually *earned* the money. It's his--of course he's going to have the "time and inclination" to take care of his money. Half of people already invest in the market. For anyone who doesn't already know how, getting the opportunity is the first--and a necessary--step to beginning.

Posted by: Matt T. at November 29, 2004 12:09 AM

"A pity they couldn't persuade the supposedly brilliant Bill Clinton to listen."

Perhaps he was too busy putting the budget into actual surplus to be monkeying around with the Constitution?

And all it took was four simple words "Save Social Security First".

Ah remember the days when people were worrying about market stability in a world where we were no longer issuing 30 year bonds? When we had a little light shining through the window? Well a little dose of "fuzzy math" went a long way there.

Even if we had a Balanced Budget Amendment it would have had a clause allowing it to be suspended in "a time of war or national emergency". The notion that it would have imposed some sort of budget discipline on this President or this Congress is wishful thinking.

Posted by: Bruce Webb at November 29, 2004 01:21 AM

Matt T. wrote, "By the same token, there's no significant incentive to manage SS well--hence the approach of a crushing deficit."

Social Security is managed fine---it's running a surplus. It's the general fund that's not being run well.

"It's his--of course he's going to have the 'time and inclination' to take care of his money."

Wrong---ownership does not confer wisdom.

I saw a summary of a study that concluded from investors' behavior that computed their average "investing time horizon" to be 1 year. And these are the investors who are expected to appropriately invest for their retirement.

Posted by: liberal at November 29, 2004 03:24 AM

Let us not forget there are plenty of "savvy" investors who fully expect to average 10 percent real returns from the stock market. It might help the debate a bit if Wall Street had some truth-in-advertising requirements.

Posted by: Randy at November 29, 2004 07:04 AM

The cited article says: "If you partially privatize and don't cut benefits enough to eliminate the existing (after 2042) deficit AND the additional deficit created by diverting funds into private accounts, you make the system's long-term deficits worse."

That's not right. If you reduce traditional benefits enough to make up for the diversion of funds to accounts, then you leave social security's finances the same. The accounts don't fix it, but don't make it worse.

One rationale for accounts is that they'd allow you to make larger than actuarially fair reductions to traditional benefits, so you'd not only "pay back" the diversion of money to accounts but also solve part of the current financing problem.

Posted by: Andrew B at November 29, 2004 07:09 AM

The cited article says: "If you partially privatize and don't cut benefits enough to eliminate the existing (after 2042) deficit AND the additional deficit created by diverting funds into private accounts, you make the system's long-term deficits worse."

That's not right. If you reduce traditional benefits enough to make up for the diversion of funds to accounts, then you leave social security's finances the same. The accounts don't fix it, but don't make it worse.

One rationale for accounts is that they'd allow you to make larger than actuarially fair reductions to traditional benefits, so you'd not only "pay back" the diversion of money to accounts but also solve part of the current financing problem.

Posted by: Andrew B at November 29, 2004 07:15 AM

The cited article says: "If you partially privatize and don't cut benefits enough to eliminate the existing (after 2042) deficit AND the additional deficit created by diverting funds into private accounts, you make the system's long-term deficits worse."

That's not right. If you reduce traditional benefits enough to make up for the diversion of funds to accounts, then you leave social security's finances the same. The accounts don't fix the existing shortfall, but don't make it worse.

One rationale for accounts is that they'd allow you to make larger than actuarially fair reductions to traditional benefits, so you'd not only "pay back" the diversion of money to accounts but also solve part of the current financing problem.

Posted by: Andrew B at November 29, 2004 07:20 AM

The cited article says: "If you partially privatize and don't cut benefits enough to eliminate the existing (after 2042) deficit AND the additional deficit created by diverting funds into private accounts, you make the system's long-term deficits worse."

That's not right. If you reduce traditional benefits enough to make up for the diversion of funds to accounts, then you leave social security's finances the same. The accounts don't fix the existing shortfall, but don't make it worse.

One rationale for accounts is that they'd allow you to make larger than actuarially fair reductions to traditional benefits, so you'd not only "pay back" the diversion of money to accounts but also solve part of the current financing problem.

Posted by: Andrew B at November 29, 2004 07:28 AM

Dear liberal,

I don't agree that SS is being run "fine" merely because it's running a surplus *now.* Not when 1)that entire surplus is being diverted out of SS and spent on other goodies, contrary to what it's supposed to be used for--future, SS payments, and 2)that surplus is only slated to last for about another decade before beginning a long slide into a crushing deficit. I would call SS "fine" and well-managed if it could provide recipients significant retirement funds while remaining solvent over the long term. It will soon do neither.

And while ownership does not itself confer wisdom, it certainly provies the incentive to get wise--moreso than for politicians who don't seem to look beyond their own term. I am skeptical as to this supposed "study" you've seen--does it even focus on investors who are exclusively using their funds for retirement? I imagine that if the government chose houses for everyone, everyone would lose the ability to pick for themselves, and then we'd be subject to the argument that only the government--elected by the same people it guides--can do it for them. People can learn, but they need the liberty and incentive to do it.

Besides, the stock market on average does significantly better than SS. You can do better through dumb luck.

Posted by: Matt T. at November 29, 2004 09:48 AM
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